SRB: The state of the policy debate on the EU crisis management and deposit insurance framework by Jan Reinder De Carpentier, SRB Vice-Chair

26 March 2021

"I will deal with some of the more current issues, including of course the Commission’s review of the Crisis Management and Deposit Insurance framework."

Thank you to Bruegel for taking the initiative to organise this series of online events. 

We have all had to adapt to the online way of working, and I am more than happy to share my thoughts on the subject of banking resolution and how it fits into the overall crisis management framework we have in the European Union.

Today, I will first give you a quick wrap-up on the past 12 months from the SRB’s perspective, and then in the second part of my opening words, I will deal with some of the more current issues, including of course the Commission’s review of the Crisis Management and Deposit Insurance framework.

[1. Taking stock]

So to the first part of my speech. I want to take a quick look at the past 12 month. The ever present backdrop was Covid-19. We have learnt to live with lockdowns, and government supports for our economies. There is no doubt that both lockdowns and public supports were necessary.

Indeed, in many cases, government supports were the lifeline allowing businesses to continue to function. However, while these supports have done their job pretty well up until now, at a certain point, that support will be stopped and businesses will have to turn a profit with reduced, or even no state support. I will come back to this point later on as we look at the future.

Although at the start of the crisis 12 months ago, there were calls for a suspension of certain regulatory measures, I think we should start by the simple fact that all the measures put in place since the financial crisis of 2007/08 were well warranted. They ensured that the banks, this time, are part of the solution and so far are weathering the storm. In addition, the regulatory measures that were put in place in the Banking Union since the last crash have proven to work well, even if there is always room for improvement. I will look at that in a moment when I speak about the Crisis Management review that is ongoing.

The current resolution framework provides flexibility, within reason. We did offer some flexibility to our banks. For example, the SRB postponed data requests or the submission by banks of less urgent information related to the 2020 resolution planning cycle, but as it turns out, there were only minor delays and banks provided all the required information. In light of the challenges posed by resource constraints and adverse market conditions, we remain ready to address any issues in relation to specific requirements with banks on an individual basis.

In addition to being flexible, the framework is also a prudent one.  Now is not the time for light touch regulation, as we begin to see the effects of the pandemic from an economic standpoint.

Our mission at the SRB is to promote financial stability and protect the taxpayer. Now more than ever, we must ensure that every bank under the SRB’s remit is resolvable; and the good news here is that banks are making progress and that even in 2020 the markets were [wide] open for banks building up the needed capital, i.e. MREL buffers.

We’ll continue to monitor the situation as we move through 2021. And it is to the future that I want to turn to now in the second part of my speech this afternoon.

[2. Completing the financial stability architecture, CMDI review, brief outlook for 2021]

Just as now is the time to ensure all banks are resolvable, it is also an ideal time to finish what we started on a number of fronts in terms of financial stability in the EU. We very much welcome the Commission’s review of the crisis management framework, currently underway. Let us take a look at that now in some detail.

• Overall, the objectives to promote financial stability, protect taxpayers’ money from bailouts, and break the sovereign-bank-doom-loop have been advanced, although there is more to do.
• On deposit insurance, the different rules across Banking Union countries are a cause for concern for us at the SRB. Discrepancies in depositor protection across Banking Union countries in terms of scope of protection, such as specific categories of depositors and payout processes result in inconsistencies in access to financial safety nets for EU depositors. This is something we wish to see addressed.
• We would see merit in revising the conditions to access different sources of funding in resolution and in insolvency. Using DGS funds is already foreseen under the SRMR and the BRRD (Article 79 SRMR and Article 109 BRRD), but their use is unlikely in practice: this could therefore be made more realistic.
• With regard to the Public Interest assessment regime, the main challenges we face for a consistent PIA across the Banking Union are:
  • first of all, differences between national insolvency regimes can lead to different outcomes for PIA, so harmonisation of national regimes or otherwise a common administrative liquidation tool would be very helpful in this regard, and;
  • secondly, access to consistent data at regional level and on DGS capacity.
• On transfer strategies: In order to improve the current situation and an adequate source of financing for resolution authorities to effectively implement a transfer strategy – that is to say, sale of business or bridge bank – in resolution to small/medium sized banks, we think that a combined use of EDIS and the SRF would help partial sales of business and transfer strategies more broadly. It would also reduce fragmentation across the Banking Union, and align decision-making and funding at the European level. Until EDIS is fully in place, access to the SRF and its combined use with DGS could be further explored, to act as funding to support those resolution tools other than bail-in that ensure the exit of resolved entities from the market through transfer strategies.

The SRB will work with the European Commission and submit full and detailed replies under the targeted consultation and we await keenly the outcome of the review.

[Ending public support / outlook]

So, coming back to the more immediate term, let us take a look at the outlook for the coming months. We all are concerned about potential cliff effects when public supports for certain sectors comes to an end. For banks, no doubt one of the main concerns will be the rise in NPLs. Banks must put in place the measures to identify and deal with NPLs, sooner rather than later, and cautious provisioning has never been harmful. However, and perhaps even as a lesson from the last crisis, if banks act properly and proactively, they should stay part of the solution not the problem.

For the SRB, in the coming years, our focus will continue to be on building resolvability. We published our multi-annual programme for the years ‘21 to ‘23 at the end of last year. Unsurprisingly, the SRB will continue to focus on making all banks under our remit resolvable. This relates to operational resolvability, as well as the necessary build-up of MREL, a key tool in resolution. We must keep up the momentum on increasing MREL, especially in light of the new rules and deadlines in the BRRD2 – 2020 was a transition year in terms of BRRD2 application.

Another area of focus for the next few years will see the SRB fully operationalise the use of resolution tools, and their combined use. In this regard, more work is needed on transfer tools in particular.

In principle, banks are expected to have built up their capabilities on all aspects by the end of 2023. Where needed and on a bilateral basis, the SRB and banks may agree alternative phase-in dates. The Expectations for Banks are tailored to each individual bank and its resolution strategy, allowing for flexibility and proportionality.

In 2021, we will also continue to build up the Single Resolution Fund as we will do every year up until 2023, when it will be fully funded. We are on target at present. I am pleased that the backstop to the Single Resolution Fund will be in place from next year. The decision to implement the backstop effectively doubles the firepower of the fund, and this will provide confidence to the markets when it is needed most. 

[Conclusion]

Ladies and gentlemen, I am coming to a close. I suppose it is difficult to predict with certainty what 2021 will hold for the banking sector. What is clear is that the current resolution framework, one of the key pillars of the Banking Union, is working. Yes, there is a review ongoing, but the current framework is protecting taxpayers, and it is so far helping to maintain financial stability. The review will hopefully act as a trigger for further progress to equitable financial stability. 

As Elke König often says, we do not have a monopoly on wisdom at the SRB, and I certainly share that view; So I will be pleased now to have a discussion with you to hear your ideas as we try to chart the way forward and emerge from the pandemic, while ensuring global financial stability. Thank you.

SRB

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